Bill Discounting – Working Capital Support
Introduction
Bill Discounting is a fund-based financial service where a bank buys a bill (Bill of Exchange) from a seller before its due date for a fee (Discount). It is a major source of working capital.
1. Process
- Sales: Seller sells goods to Buyer on credit (e.g., ₹1 Lakh, 90 Days).
- Draws Bill: Seller draws a bill. Buyer accepts it.
- Discounting: Seller gives bill to Bank. Bank deducts interest (say ₹2000) and pays balance (₹98,000) to Seller.
- Collection: On 90th day, Bank collects ₹1 Lakh from Buyer.
2. Difference: Factoring vs Bill Discounting
| Feature | Bill Discounting | Factoring |
|---|---|---|
| Instrument | Bill of Exchange (Negotiable Instrument) | Invoice (Not a negotiable instrument) |
| Regulation | NI Act, 1881 | Factoring Regulation Act |
| Service | Pure Financing | Financing + Collection + Ledger Mgmt |
| Recourse | Always with Recourse (Seller pays if Buyer defaults) | Can be Non-Recourse |
3. Importance for MSMEs
- MSMEs often face delayed payments from big corporates.
- TReDS (Trade Receivables Discounting System): An electronic platform by RBI where MSMEs can auction their bills to multiple banks to get the best rate.
Summary
- Nature: Short term borrowing against a Bill.
- Security: The Bill itself (and Seller's credit).
- TReDS: RBI platform for digital discounting.
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